Policymakers generally believe that the adoption of advanced construction methods such as the industrialised building system (IBS) not only can help in increasing the supply of houses but also in reducing house prices.
This is mainly due to the perception that construction cost is a major barrier towards the wide-scale provision of affordable housing hence, the reduction of the construction cost will enable properties to be built with lower cost, thereby leading to a lower selling price.
However, there is still uncertainty if IBS can really reduce the cost of construction. In the Malaysian construction industry, there is a common perception that the use of IBS will result in an additional 10% construction cost due to its high capital investment in skilled labor, heavy equipment, and mechanised construction facilities. As such, one can hardly conclude that advanced construction methods can bring down the selling price.
Housing development costs comprise construction cost, land cost, soft cost (referred to as professional fees), compliance cost, and finance charges. The common distribution of these costs is 50%, 20%, 10%, 8%, and 2% of the total development cost, respectively.
In terms of construction costs, it is further divided into building cost (70%), infrastructure cost (20%), and preliminaries and contingencies (10%). Building cost alone can be further subdivided into superstructure (50%), substructure (15%), architecture and finishes (20%), and M&E services (15%).
IBS mainly affects the cost of structural and wall element of a building. If structures and walls (superstructure) make up only half of the total building cost, while building cost contributes to 70% of the total construction cost, which is about half of the selling price; then, an IBS method of construction has an influence on only 17.5% of the selling price of a house.
In this case, if the adoption of IBS is said to reduce 10% of the cost of structure and walls, the equivalent saving is about 1.75% of the selling price, which is not as impactful in reducing the cost barrier to affordable housing.
This can be better illustrated with the following simulation (Figure 1). Let’s assume 400 units of 900sq ft average standard apartment with the selling price of RM300,000 per unit area to be constructed on five acres of land, with a land price of RM130 per sq ft, which is subject to the density of 80 units per acre. As one can observe, the building cost in this case makes up 77% of the total construction cost, which is 49% of the total selling price.
Again, if IBS is used for the construction of superstructure, which consists of 46% of the total building cost (while the remaining building cost is shared by substructure, M&E and architecture, and finishes), the equivalent cost of IBS components is 22.5% of the total unit selling price. Consequently, a 10% cost reduction brought by the adoption of IBS — due to the advantage of standardisation and repetition — will only reflect a saving of 2.25% in the selling price.
IBS construction is also costlier than conventional cast-in-situ in terms of material. This is proven by comparing the buildup rate of constructing one sqm precast concrete slab and one sqm reinforced in-situ grade 35 slab (Table 1). As one can observe, IBS construction does reduce labor costs by as much as 47%.
However, due to the higher cost of material, the total cost of constructing one sqm precast concrete slab is much higher than one sqm reinforced in-situ grade 35 slab, resulting in an additional cost of 5.28%. Considering that labor cost only constitutes 14% (at maximum) of the total cost of one sqm cast-in-situ slab, there is little incentive for builders in the country to adopt IBS.
IBS may even lead to a higher cost of construction if it does not fit in properly with the existing construction ecosystem. This can be better illustrated by comparing the basic prices of two common construction items: labour rate (USD/day) and concrete cost (USD/m3) among countries (29 selected global economies).
Labour rates in developed economies tend to be significantly higher than those in developing countries. Malaysia has routinely engaged a large number of construction workers from Indonesia and Bangladesh to support the local construction industry as the local labour force was reluctant to work in the industry.
When these basic prices are presented as a ratio (1m3 concrete/one-day construction labor wages), it is apparent that 1m3 concrete is worth 2.29 days wages in Malaysia (an upper-middle-income country), as compared to 0.82 days wages in Singapore (a high-income country). For a lower-middle-income country like Vietnam, the ratio is even higher at 3.56.
Conclusion
The lower labour cost in developing countries motivates builders to adopt more labor-intensive processes and to economize on concrete materials in their construction. The higher wage costs in developed countries, on the other hand, will motivate builders to reduce their dependence on labour by adopting standard concrete element sizes (IBS components) even though these result in a greater quantity of concrete.
Supposedly, advanced construction methods can help lower construction costs, leading to a more affordable housing product in the market. However, by plotting house prices (USD/m2) against the inverse of concrete/labour ratios — which is treated as a proxy of the construction technology level of a country — one may find that higher construction technology may not necessarily lead to lower house prices. Except for outliners like Hong Kong, the higher the level of construction technology — indicated by the bigger value of the inverse of concrete/labour ratios — the higher the house prices are.
Higher construction technology level with less labor-intensive and more utilisation of prefabricated systems does not necessarily result in lower house prices. In fact, house prices in developing economies are able to be kept lower due mainly to the selection of appropriate construction methods that suit the local market. In Malaysia, the main contributor is the large involvement of cheap foreign unskilled labour.
The successful implementation of IBS in developed economies emerged out of the necessities and desires of society. The reason that these countries have become proficient in IBS is mainly attributed to events that have spurred this, including the industrial revolution, wartime, and post-war housing crisis; which caused a great shortage of housing supply. Though the demand for housing in these countries is temporarily fulfilled by taking advantage of mass production of IBS, house prices can hardly come down due to strong demand.
The main driving force of involvement in construction technological innovation in countries like China and India is the need to cope with huge housing demand following the rise in urbanization. With a lack of housing supply and tough competition among builders, leverage on advanced technology is needed to increase construction productivity and outperform competitors.
Higher housing demand will eventually lead to higher house prices, and increased construction productivity serves to shorten the closing up of the supply-demand matching process while the housing market is still in the rising trend. In this sense, one can hardly conclude that construction technology is the main driver to reduce house prices.
— theSUN ON FRIDAY | May 2019
>>This article was contributed by Arkitek M. Ghazali principal Ar. Mazlin Ghazali and MKH Bhd manager of product research & development Dr Foo Chee Hung.